An opportunity to re-imagine business – Cipla

Update on the Indian Equity Market:
On Wednesday, Nifty50 snapped its six-day winning streak to end 0.1% lower at 11,308. HCLTECH (+4.7%), SBIN (+4.3%), and TECHM (+2.8%) ended the day in the green. KOTAKBANK (-2.1%), CIPLA (-2.1%), and SUNPHARMA (-2.0%) led the laggards. Among the sectoral indices, PSUBANK (+2.7%), MEDIA (+2.4%), and AUTO (2.0%) led the gainers while PHARMA (-1.6%), REALTY (-0.7%), and METAL (-0.7%) led the losers.

Cipla recently declared 1QFY21 results. Mr. Umang Vohra, MD & Global CEO discussed the opportunities provided by the covid epidemic to the business with Economic Times on 11th August 2020. Here are the edited excerpts of the interview:

• He outlined three reasons for the good numbers reported. The first being that healthcare is a part of essential services continues to work despite the pandemic led lockdowns. The second being the tailwinds of the crisis is the increased levels of collaboration and cooperation with every healthcare authority in the world. The third reason being getting more Covid treatments out as soon as possible and ensuring drug supply is not affected.
• The Covid crisis has given an opportunity to reimagine their business. It has given an opportunity to understand what is important to running their business. There were a few costs that could not be incurred. Since all the manufacturing plants are operating, those costs have increased slightly as more precaution for social distancing needs to be taken. The absence of some of the field costs has helped the bottom line.
• The timelines of approvals are at an all-time high and in terms of pricing, the only market that was a concern was the US. In the US, more attention is paid to the availability of the product against price.
• Respiratory is the core therapy for Cipla and they are trying to expand their respiratory franchise. Albuterol is the first one and there is a reasonable pipeline built for unlocking the respiratory franchise in the US over the next 18-24 months.
• Albuterol production has ramped up quite significantly in the first quarter and it being a 60-million-unit market, Cipla will get its fair share in the market.
• Some of the cost control measures were voluntary and some were involuntary. Due to lockdowns, travel costs were not incurred. Some of that would resume again in the coming quarters. There is an ambitious cost program which has been running for the past 2-3 years and which will continue to run.
• The guidance for margins has been to the same level before lockdown; as a large portion of the cost base cannot be maintained so low. So the sustainable basis for every quarter is going to be slightly lower than the first quarter in absolute percentage terms.
• With the crisis lasting a little longer in India, chronic conditions will continue to stay the same. The respiratory linked illnesses, linked to weather and linked to winter will continue. Acute therapy is impacted as patients are healthier and not reporting sick. Hospitals are beginning to uptick now and expect to see a resumption of surgeries and elective procedures in a quarter’s time.
• Cipla’s business is changing and about 15-20% of its market will be very different compared to pre-covid.
• Digital has the ability to penetrate healthcare more significantly compared to physical representatives. Digital provides remote connect which is faster and economical.

Consensus Estimate: (Source: market screener website)
• The closing price of Cipla was ₹ 762/- as of 12-August-2020. It traded at 29x/ 25x/ 21x the consensus earnings estimate of ₹ 26.2/ 30.2/ 36.7 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 769/- implies a PE multiple of 21x on FY23E EPS of ₹ 36.7/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”